Closing Costs

The BUYER customarily pays for the following:

  • Lender’s title policy premiums
  • ½ of the escrow fee (On VA loans, the entire escrow fee must be paid by the seller)
  • Document preparation (if applicable)
  • Notary fees (if needed)
  • Recording charges for all documents that are in the buyers name
  • Homeowners’ association transfer fees
  • All new loan charges (except those required by the lender to be paid by the Seller)
  • Interest on the new loan from the date of the funding to 30 days prior to the first payment date
  • Hazard insurance premium for the first year
  • Home warranty (as specified in the contract)
  • All pre-paids
     

The SELLER customarily pays for the following:

  • Owners title policy premiums
  • Real Estate commission
  • ½ of the escrow fee (On VA loans, the entire escrow fee must be paid by the seller)
  • Any loan fees required by buyer’s lender (specified in the contract)
  • Payoff of all loans
  • Any interest that may have accrued to the lender being paid off, statement fees, reconveyance fees and any prepayment penalties
  • Termite report and any work required (as specified in the contract)
  • Home warranty (as specified in the contract)
  • Any judgments, tax liens, etc. against the seller
  • Recording charges to clear all documents of records against seller
  • Tax proration (for any taxes unpaid at the time of title transfer)
  • Any unpaid homeowners’ association dues
  • Any bonds or assessments (as specified in the contract)
  • Any and all delinquent taxes
     

The lists above are provided for reference only and are not necessarily all-inclusive.  All allowable or non-allowable fees may not be identified.

Closing costs explanations

Loan discount (points):  A one-time charge by a lender to adjust what they will earn on the loan so that the loan can be more easily sold to other financial institutions.  A “point” is equal to one percent of the mortgage loan amount.  For an example, if a lender charges four points on a $60,000 loan the total charge would be $2,400 ($60,000 X .04).

Credit report fee:  Before a lender will provide financing for a buyer they will want to determine the credit worthiness of the buyer.  The lender will order a credit report from a credit reporting agency and will use the information it obtains from that report in conjunction with information that was submitted with the loan application to determine credit worthiness.  The Credit Report Fee represents the cost associated with ordering a credit report from the credit-reporting agency.

Appraisal Fee:  Before a lender will make a loan on a property they generally require that the value be established so an appraisal of the property will be necessary.  The appraisal fee represents the cost associated with appraising the property.  The cost of the appraisal can be paid by either the buyer or the seller or a combination of both and will have been outlined in the purchase contract.

Lender Inspection Fee:  This charge represents inspections that need to be completed by third parties or the lender itself.  Inspection fees are commonly associated with newly constructed homes.

Mortgage Insurance  (MI or PMI): The new lender may require mortgage insurance if the buyer fails to invest a specific amount of their own funds in the purchase.   Failure to invest may encourage the lender to secure additional insurance to cover its financial exposure should the borrower fail to make payments on time and the loan goes into default or is foreclosed.  The cost of obtaining this insurance is referenced to as a mortgage insurance fee.

Pre-Paids:  Specific charges or costs that must be paid in advance such as: accrued interest, mortgage insurance premiums and hazard insurance premiums at the time of closing.

Interest:  Interest is paid in arrears so lenders commonly require a borrower to pay interest from the date of closing until the date of the first monthly payment.  For example, if your loan settled on April 16th and your first monthly mortgage payment wasn’t due until June 1st, the lender would require that you pay the interest from April 16th until May 1st.  Since interest is paid in arrears, the June monthly payment would pay the interest for the month of May.

Hazard and Flood Insurance:  The lender will require the buyer to obtain insurance to protect the home against fire and other perils.  Generally the lender will require that the first year premium be paid at the time of closing.  A homeowner policy offers more comprehensive coverage for the borrower beyond just damage caused by a fire and should be carefully considered since owning a home may well be the most important asset anyone will own.  Hazard insurance does not routinely cover losses caused by flooding.  If your mortgage is federally insured and is determined to be in a flood plain identified by the federal emergency management agency (FEMA), you may be required by federal law to carry flood insurance on your home.

Reserves (also known as impounds or escrow) deposited with a lender:  Reserves are monies help in a special account by the borrowers’ lender to pay hazard, flood, real estate taxes, mortgage insurance and other recurring expenses throughout the year.  Similar to prepaid interest, an initial deposit will be required at time of closing so the lender will have sufficient funds in the account when the premium bills become due and payable.  An additional payment will be collected from each monthly payment that you make.

Since tax and insurance premiums continue to increase year after year, you should expect to see your monthly mortgage payments increase each year.  Unless you have an adjustable rate loan (ARM), the core segment of your payment (Principal and Interest or P&I) will remain the same; only the amounts needed for taxes and insurance will increase over time.

Monthly mortgage payment composition:

+ Principal and Interest
+ Real Estate Taxes
+ Hazard Insurance
+ Mortgage Insurance

= Total monthly mortgage payment